Dividend Growth Investing – Consumer Discretionary Stocks

Consumer discretionary stocks should typically perform well when the economy is doing well because people have more discretionary income. This is opposite to consumer staples stocks which perform well in any economic climate because people need them no matter what the economy is doing.

The first thing we need to do is come up with our universe of consumer discretionary stocks. We first scan all consumer discretionary stocks that have increased dividends for 20 or more years. We then remove those companies with a market cap of less than $10 billion which gives us the below list:

Consumer Discretionary Stocks UniverseNow we look at the Q-Scores for these 8 stocks:

Consumer Discretionary Stocks Q-Scores

We see that McDonalds (MCD) has the highest Q-Score which is intuitive as MCD has always been seen by DGI investors as a must-own stock. What’s interesting about McDonalds is that everyone sees the more expensive fast food outlets as stealing McDonalds’ market share and the Company needs to reinvent itself. That’s true but MCD may behave similar to a defensive consumer staples stock since when the economy tanks, people tighten up their wallets and gravitate towards cheap food.

We will add MCD and also add VFC which provides brand name clothing that people will likely purchase when they have more discretionary spending. You’re not going to splurge on that expensive North Face jacket unless times are good right?

The next to stocks present us with a dilemma of sorts since they have very similar Q-Scores. This is where we start to look at what business each company is in and how that compliments are overall portfolio. In the case of Target (TGT), they operate in much the same business that Walmart (WMT) does. They both sell things you need for living at low prices. Since we already own WMT which has a Q-Score of 19.48, we’ll look past TGT. We don’t want to own two stocks that would have correlated returns because they operate in the same space.

This means we pick Lowes (LOW) right? Not just yet because we see that T.J. Maxx (TJX) has a Q-Score that is only 33 basis points off of LOW. So what does TJX actually do? They sell clothing. Since we already own VFC, we don’t want to own another company that sells clothes. This means we’re comfortable adding LOW since they have a strong Q-Score and they are also a play on construction which would be very sensitive to an economic downturn.

We’ve already been accumulating positions in both MCD and VFC which are seen below:

Consumer Discretionary Stocks Contributions

In order to hit our target position size of $13,333, we need to invest the following amounts monthly for the next 24 months:

  • LOW: $550
  • VFC: $250
  • MCD: $160

Q-Scores can and will change over time and we’ll keep an eye on them. We’ll look for minimal turnover and if any stock has a Q-Score that skyrockets or tanks, we’ll start asking questions and get to the bottom of it. Until then, we’ll enjoy our steadily growing income from these 3 consumer discretionary stocks.

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